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Paulson says troubled assets will not be purchased

The government has abandoned the original
centerpiece of its $700 billion rescue effort for the financial
system and will not use the money to purchase troubled bank assets.

Treasury Secretary Henry Paulson said Wednesday that the
administration will continue to use $250 billion of the program to
purchase stock in banks as a way to bolster their balance sheets
and encourage them to resume more normal lending. He also announced
that the administration was looking at a major expansion of the
program into the markets that provide support for credit card debt,
auto loans and student loans.

Paulson said 40 percent of U.S. consumer credit is provided
through selling securities that are backed by pools of auto loans
and other such debt. He said these markets need support.

"This market, which is vital for lending and growth, has for
all practical purposes ground to a halt," Paulson said.

Bush signs billBrendan Smialowski/Getty Images

On the issue of using the $700 billion bailout package to
provide help to ailing auto companies, Paulson said the
administration preferred an approach that would accelerate support
to that industry from other legislation Congress passed this fall.

Paulson said the administration is exploring other options,
including expanding the program beyond banks to nonbank financial
institutions which provide essential credit to both businesses and
consumers. He suggested that capital could be provided to
institutions on a matching basis in which the government would
supply money to those able to raise money on their own.

Providing an update on the largest government bailout in U.S.
history, Paulson said that the effort was showing results but that
more efforts were needed given the most severe downturn being faced
in housing.

"Our financial system remains fragile in the face of an
economic downturn here and abroad," Paulson said. "Market turmoil
will not abate until the biggest part of the housing correction is
behind us. Our primary focus must be recovery and repair."

The administration decided that using billions of dollars to buy
troubled assets of financial institutions at the current time was
"not the most effective way" to use the $700 billion bailout
package, he said.

Protesters oppose bailoutSpencer Platt/Getty Images

The announcement marked a major shift for the administration
which had talked only about purchasing troubled assets as it
lobbied Congress to pass the massive bailout bill.

The bailout money also should be used to support efforts to keep
mortgage borrowers from losing their homes because of soaring
default levels, he said.

A proposal to have part of the bailout funds used to guarantee
mortgages that have been reworked to reduce monthly payments for
borrowers is an approach the administration continues to discuss,
Paulson said, although he indicated it would not be a part of the
rescue program. He said it went beyond the intent of the
legislation Congress passed on Oct. 3.

Asked about what he had in mind to expand the rescue effort to
support credit card and other types of consumer debt that is backed
by selling securities, Paulson said it would probably take weeks to
design the new program and then more time to get it implemented, a
possible sign that any such proposal would have to be implemented
by the incoming administration of President-elect Barack Obama.

Speaking of the first-ever summit of leaders of the Group of 20
major industrial and developing countries, Paulson said this
weekend's meeting needs to focus first on how to repair the
financial system as a way to bolster the global economy.

Bailout graphicMPR Graphic/Than Tibbetts

Elsewhere, Paulson praised a new set of guidelines issued
Wednesday by the Federal Reserve and other bank regulators, saying
that they addressed a crucial issue of making sure that banks
continue to lend at adequate levels.

The guidelines urge institutions to continue lending to credit
worthy borrowers and to work with mortgage borrowers to avoid
defaults. In addition, the guidelines encourage the banks to set
dividend payments for shareholders and compensation for executives
with the current crisis in mind.

The guidelines address criticism that banks obtaining funds from
the $700 billion rescue plan could simply use the money for their
own purposes rather than helping struggling homeowners and the
overall economy.

Critics are concerned that banks, which are getting $250 billion
through government purchases of their stock, are not using the
money to boost lending to customers, one of the main reasons why
the economy is in a crisis.

"If underwriting standards tighten excessively or banking
organizations retreat from making sound credit decisions, the
current market conditions may be exacerbated, leading to slower
growth and potential damage to the economy," according to the
regulators' guidance.

The Fed, Federal Deposit Insurance Corp., Office of the
Comptroller of the Currency, and Office of Thrift Supervision said
all financial institutions were expected to follow the new
guidelines, even those not receiving federal assistance.

The Bush administration already has committed $250 billion of
the $700 billion rescue fund for the purchase of bank stock, giving
financial institutions an infusion of cash the government hopes
they will use to resume more normal lending operations and address
the most severe credit crisis in decades. On Monday, the
administration announced that it was allocating another $40 billion
as an investment in troubled insurance giant American International
Group.

Those decisions leave only $60 billion of the initial $350
billion left to allocate. To access the second $350 billion, this
administration or the next will have to make a request to Congress
for the money.